A legally binding promissory note is used when lending money. It’s a document that states the parties involved, how much is being lent, any pertinent financial information, and signatures by the involved parties.
The agreement must be clearly defined so that no argument can be made.
Four parts
There are four integral parts to a legally binding promissory note.
- Parties – individuals or entities involved in the transaction. A party must be of legal age and of sound mind capable of entering into a transaction.
- Promise – Defines what is agreed upon. It defines the amount to be paid and should also include a paid off date.
- Sum certain – Specific financial information including, exact amount, pay off date, interest, amortization, penalties, and when those penalties must be assessed.
- Signatures – to be signed by all parties involved.
These four parts must be included and clearly defined, otherwise the agreement might not be enforceable.
Once the promissory note is signed and has all the necessary parts in it, it becomes legally binding. Once legally binding, all parties involved must meet their part of the agreement.
Promissory Note Uses
Essentially, a promissory note is used when lending/borrowing money. Mortgages, car loans, student loans, personal loans, and business loans all use promissory notes to legally enforce that the borrower must pay back the loan, plus interest, in a specified period of time.
Different kinds
There are two different types of promissory notes, simple and demand.
A simple promissory note is one scheduled, lump-sum payment on a specified date.
A demand promissory note is when the lender asks for payment to be made. Normally, there is a reasonable amount of time needed between ask and delivery.
Collection
More often than not, the borrower will abide by the terms of the promissory note and pay on time. If they don’t, however, there are a few things you can do.
Talk to them. Make sure they are doing okay. Send them a written reminder. If need be, you can send one at 30, 60, and 90 days. If they’re in a tight spot, see if they can make partial payments.
A legally binding promissory note is a very important document. Make sure you include all four parts to make it enforceable and legally binding. Might not be a bad idea to have an attorney take a look at it before you enter into the agreement.
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Jacob Sensible is a financial advisor with decades of experience in the financial planning industry. His journey into finance began out of necessity, stepping up to support his grandfather during a health crisis. This period not only grounded him in the essentials of stock analysis, investment strategies, and the critical roles of insurance and trusts in asset preservation but also instilled a comprehensive understanding of financial markets and wealth management. Jacob can be reached at: jake.sensiba@mygfpartner.com.